Know Your Customer – often abbreviated to KYC – describes the process which a company goes through in checking out a customer before deciding whether to do business with them. KYC doesn’t apply to businesses where customers pay before they receive goods or services. It is really only relevant to situations where companies supply goods or services along with an invoice, hoping that the bill will be settled after 30 or 60 days. Not getting paid can dramatically affect a company’s cashflow, and in the worst-case scenario, force an organisation into liquidation. So many organisations choose to implement a robust KYC checking process to avoid dealing with risky customers in the first place.

Why is KYC so important?

Going back a few years, most organisations had local customers. A supplier of, for example, paint would sell to wholesalers and decorators in their local area. They knew their customers personally, with relationships built up over years. However, the economy is now global. Most companies are still dealing with their local customer base, but also fulfilling orders from around the globe. And this is where KYC comes in. If your business receives a huge order from India, Argentina or South Africa, should you send the goods?

The other consideration is money laundering regulations. Under UK law and in most of the rest of Europe, there are rules about dealing with companies overseas. A UK supplier would have to establish details such as registered address and names of directors before receiving large sums in payments for goods from overseas. In addition, there are all manner of rules and restrictions against doing business with organisations in specific countries, or in specific market sectors. If you fall foul of sanctions, then there could be stiff financial penalties too.

Verifying Company Identity

In many ways, the KYC process is like checking the identity of an individual. Rather than asking to see a passport and driving licence, suppliers might be asking for company registration certificates, lists of directors and doing searches on the local equivalent of Companies House. Nothing which a customer tells you should be taken on face value. Most customers, both in the UK and overseas, are more than happy to send you copies of their certificates of incorporation and details of their directors. The trick is spotting the fake documents among the piles of real ones.

This isn’t always easy, and many smaller businesses choose to outsource verification to expert companies instead. These companies have people spending all day, every day vetting companies overseas. They know exactly what to look for, and which databases to search for reliable information. KYC is the art of looking at all the data you have on a customer overseas, weighing up how important and significant that data is, and then making the decision whether to go ahead with the deal or not. Companies which are dealing with overseas customers or suppliers on a regular basis should have a written Know Your Customer policy and make this available to everyone in the company.